Saturday, 16 June 2012

Things Just Got a Lot More Complicated in Europe

United they stand, divided they ____?

It's tough to say whether the eurozone as a whole is headed into recession, but I can't figure that the mixed results in the elections this weekend helped that cause. I've postulated before that prolonged recessions seem inevitable in Greece and Spain, and austerity measures designed to curb rapidly rising debt levels in France and Germany are likely to curb any economic strength. In short, the possibility of a Euro-recession is a real possibility.
The secret to survival over the next few months, until we get a better understanding of how these new governments will cooperate with one another, is to focus on strong cash flow businesses that tend to perform well even in stagnant times. This means telecom and health-care companies just might be your best shot at betting on a European recovery.

What does this mean for your money?

With many investors trading more on emotion than actual earnings results, it's likely we can expect more pressure on European-based businesses. The fallout in some companies can be, at least to some extent, justified as with large Spanish banks, Banco Santander (NYSE:STD  ) and Banco Bilbao Vizcaya Argentaria (NYSE: BBVA  ) . Both of these institutions are dealing with ridiculously high unemployment rates and commercial real estate portfolios littered with potential problem loans.
But we're also likely to see pressure on companies that won't be directly affected by austerity. Two such companies that may get lumped into the "guilty by association crowd" are France Telecom (NYSE: FTE  ) and U.K.-based oil services company BP (NYSE: BP  ) .
France Telecom has been on a steady downtrend over concerns that its mobile business may suffer as Europeans cut back on discretionary spending. What investors are failing to take notice of is France Telecom's strong international growth in Sub-Saharan Africa and even in troubled Spain.
As for BP, weakness in the stock makes little sense because so many of its oil assets are diversified throughout the world. There may be some give and take as emotional oil traders react to the unpleasant news out of Europe, but that's hardly a game-changer for a company that's putting its Gulf of Mexico PR nightmare in the rearview mirror.

Banco Bilbao Vizcaya Argentaria (NYSE: BBVA  ) .

 France Telecom (NYSE: FTE  )

 BP (NYSE: BP  ) .

It is interesting to review this old article 

December 10, 2010:    What Happened to Banco Santander?

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